Accounting Help for Assignment
Ip 5 Net Present Value Determining the value of the income from a project in today’s dollars Compare that to today’s investment
Ip 5 Example Lottery Payments Lump sum Annuity The same amount for a specified period of time Lump sum This is the NPV of the annuity This will be less than the payments You can invest at the present interest rate and have the payments
Ip 5 Deer Valley Lodge Installing a new lift We want to consider only 1 lift (not 5) We are looking at the income from this lift Is it a good investment?
IP 5 Make initial calculations Investment Income (Revenues) Expenses Price of lift + installation and slope prep Income (Revenues) Additional skiers x number of days they will be there x price of a ticket Expenses Daily expenses x days open Net income (cash flow) Our Annuity Income - Expenses
Question 1 Before Tax NPV Before Tax NPV = Yearly Net income x NPV factor NPV Factor - Page B-11 (Appendix) Table B.3 Present value of an annuity of $1 14% NPV factor is where the 2 meet 20 Periods 20 years for 14% is 6.6231 (not given in table) Compare the Before Tax NPV to the Investment If the NPV is more than the investment, it is a good investment
Question 2 – Step 1 After Tax NPV Before tax income is 100% of income After tax income deducts the taxes 100% - 40% = 60% left after taxes After tax net income = Net income (from beginning) x 60% After tax NPV = After tax net income x NPV factor NPV factor page B-11 Go down 20 periods and across to 8% (after tax required rate of return)
Question 2 – Step 2 NPV of Tax Savings Tax Savings = Investment x tax rate NPV of tax savings = tax savings x NPV Factor NPV factor table is given in your assignment Go down to 8% ( discount rate) and across to 10-years We depreciate the investment for 10 years
Question 2 – Step 3 Total NPV = After Tax NPV (Step 1) + NPV of the Tax Savings (Step 2) Compare to the investment If the NPV is more than the investment, it is a good investment
Question 3 Discussion Subjective factors Our projections are based on estimates What will cause our estimates to be incorrect? What will cause us to make more money? What will cause us to make less money? Think of things like the economy, etc.